Give Me a Crash Course In . . . Greek default

What's going on with Greece? After four months of negotiations, discussions between the Greek government and the institutions formerly known as the troika over a new bailout programme have broken down. The ECB, European Commission and IMF want Greece to make further cuts in exchange for €7.2 billion still in the kitty under the current bailout. The Greek government believes it has made enough cuts and should be given the money anyway before a new bailout package – probably including some promises of debt relief – is negotiated. Focus is now turning to yet another emergency summit of euro-zone leaders, on Monday.

Could Greece really leave the euro? Yes. Greece is moving ever closer towards default, which may trigger a euro exit. It must repay €1.5 billion to the IMF on June 30th and billions more to the ECB in July and August – and has already confirmed that it does not have the money. Despite suggestions that Greece could have availed of a 30-day grace period with the IMF if it misses its June 30th payment, Christine Lagarde ruled that out on Thursday. A default to the IMF would also mean that Greece would technically be in default to all three troika members. If the bailout programme expires on June 30th without being renewed the ECB could then stop providing the Greek banking system with the emergency funding that has been propping it up.

What would happen if Greece defaulted? The ECB president, Mario Draghi, admitted this week that this would be uncharted territory. In the first instance, capital controls, including limits on credit-card transactions, are likely to be introduced, to stop money leaving Greece. A parallel currency could be introduced alongside the euro.The devaluation might initially boost the Greek economy, but the country would find it hard to raise funds on the private markets.

Could a deal yet be done? Yes. The IMF repayment is still 10 days away. Despite all the talk of countries needing time to refer a deal to their parliaments, if the political will to reach an agreement is there, a deal could be rustled up. Despite the recriminations from both sides, the divergence between Greece and its creditors is not huge. The discussions have been whittled down to a cluster of specific issues: pensions, Greece's primary surplus, and VAT rates. Pension reform is by far the most sensitive issue for Greece, although EU sources insist that Athens must compromise, given that pensions make up a huge part of Greek public spending.

Who is in the right, Greece or the troika? Almost everyone agrees that the Greek crisis has exposed the euro zone's policy of austerity, particularly the design of the five-year Greek bailout, as inherently flawed, and there is sympathy for the Greek position. But there is also a strong resistance, both from citizens and from governments across Europe, to ceding any more ground to Greece, particularly as this would trigger calls for debt relief from other countries, not least Ireland.

Who will blink first? Both sides have strong cards to play. The threat of contagion if Greece leaves the euro is much lower than in the heady days of the euro-zone crisis, when developments in Greece affected bond yields in other countries. Greece represents less than 2 per cent of euro-zone GDP, so the zone would be able to handle the exit in the short term. As the Finnish finance minister, Alex Stubb, put it this week when asked if Grexit would be a problem for the euro zone, it would be "not as bad a problem as it would be for Greece". But the IMF, ECB and EU member states stand to lose billions of euro if Greece defaults. It also sets a dangerous precedent for the euro project: once one country leaves, any other economy that finds itself in difficulty might also head for the exit door. Ultimately, no political leader, not least Angela Merkel, wants to preside over the break-up of the euro.